Drugs giants face investor exodus

THE drugs industry, buoyed for 20 years by blockbusters such as Viagra and Prozac, is under siege. Drugs companies are facing an unprecedented threat from cheaper rivals flooding the market.

The severity of the assault on the multinational giants has been thrown into sharp relief within the past fortnight by high-profile cases in the American courts against Britain's two biggest drugs groups.

GlaxoSmithKline saw the patent on its key antibiotic, Augmentin, overruled. In a separate case, AstraZeneca is awaiting judgment on the patent for its antacid drugs Losec and Prilosec. Both companies can appeal against adverse rulings, but investors have already taken flight, sending shares diving amid severe profits downgrades by City analysts.

Patents on leading drugs developed in the Eighties and early Nineties are running out and cheaper copycat, or generic, products are threatening to muscle in on the market. At the same time, the number of new drugs being developed by the pharmaceutical giants is shrinking.

Meanwhile, governments in developed countries are keen to improve efficiency in their health services, which means pressure on suppliers to reduce costs.

Epidemics such as HIV/AIDS in Africa have led many to question whether patents on life-saving but expensive drugs or vaccines should simply be ignored in the interests of public health.

Stockbroking agency Charles Stanley said: 'The Augmentin case showed that US courts can overturn patent protection that investors have come to rely on to maintain topline growth. And the huge research and development commitment required to keep the drug pipeline full is growing, not receding.'

The threat to each drug company has led to rumours that the giants will merge to help pool their risks. Only days ago, Glaxo was tipped to be in talks with American rival Bristol-Myers, though no deal is believed to be imminent. But the crisis is not restricted to Glaxo or AstraZeneca. 'It's an industry-wide problem,' said James Dawson at Charles Stanley.

Figures from US investment bank Lehman Brothers show that since 1991, research and development spending by the drugs giants has almost doubled. Sales, too, have risen by the same amount. However, the number of new drugs being licensed for use has almost halved. In other words, twice the money is being spent on only half the number of products. That means the risks to investors are greater than ever.

Potential profits from a Prozac or Viagra are huge, but the obsession with big-selling products leaves drugs companies addicted. They need to find a blockbuster product every few years to keep them on an earnings high. The patent on Prozac, created by US group Eli Lilly, expired last August. Since then, Prozac sales have fallen by 70% as copycat drugs have taken over its market.

Global agreement on drug patents has also become a key issue for the World Trade Organisation. GlaxoSmithKline, along with a number of other drug groups, threatened legal action last year against South Africa when it threatened to use copies of key HIV/AIDS treatments rather than pay for dearer, patented Western products. A courtroom showdown was avoided, but Glaxo now provides its treatments at cost price.

The shift in sentiment on drugs companies has been dramatic. Normally, they would be viewed as defensive safe havens during a stock market downturn. However, Glaxo's shares have fallen 22% in the past year while AstraZeneca is down 13%. As risks inherent in the drugs industry come under scrutiny in the City, it is little wonder that some of the Square Mile's biggest investors have steered clear.